The Agency Relationship in Churches An Empirical Analysis

The agency relationship has been observed in a variety of settings. Churches, like other organizations, are plagued with the typical agency problems of moral hazard, observability, goal displacement, and risk aversion. How do churches cope with these issues in dealing with their most critical resour...

The agency relationship has been observed in a variety of settings. Churches, like other organizations, are plagued with the typical agency problems of moral hazard, observability, goal displacement, and risk aversion. How do churches cope with these issues in dealing with their most critical resource, clergy? This study analyzes the agency relationship between churches and their clergy.
Using data from nine denominations, this study finds strong evidence that pastor compensation is not tied directly to performance, but rather indirectly through promotion tournaments. Successful pastors are rewarded by being called to larger, presumably wealthier and more prestigious, congregations. Since it is so difficult to observe and measure a pastor's performance in specific activities, churches differentiate good pastors from mediocre ones by considering their total performance, rather than any specific activities.
Agency theory has been applied to a variety of organizational types and organizational structures. Scholars have used it to analyze sectors as varied as retail sales (Eisenhardt 1988), the military (Asch 1990), the professional golf tour (Ehrenberg and Bognanno 1990), medicine (Gaynor and Pauly 1990), universities (Gomez-Mejia and Balkin 1992), banking (Blackwell, Brickley, and Weisbach 1994), and the oil industry (Nygaard and Myrtveit 2000). One type of organization where it has been applied on only a limited basis is a church (Zech 1998). But churches, while in many ways more complicated than either proprietary organizations or other nonprofits (e.g., lacking the incentive structure and bottom-line measure of success provided by profits, while providing their primary benefits in the afterlife) are the quintessential example of an organization built on a foundation of people-to-people relationships.
This article considers one of the most critical types of agency relationship in churches, those involving pastors. Depending on church polity, pastors may be involved in an agency relationship in which they serve as an agent of either denominational officials or congregation members. But in either event, it is probably safe to assume that pastors respond to incentives, and that their agency relationships are plagued by the familiar agency problems of moral hazard, observability and measurement, goal displacement, and risk aversion.
The following sections of this article will describe the agency relationship as it applies to pastors, discuss some possible solutions, and then theoretically model and empirically test elements of the pastor-agency relationship. Finally, some conclusions and policy recommendations are offered.